MF Global shortfall began before CME audit, trustee says

February 06, 2012|By Alejandra Cancino | Tribune reporter

A sign in front of the Chicago Mercantile Exchange is seen in this July 9, 2007 photo. (AP file photo/M. Spencer Green)

MF Global Inc. began to accrue a deficit in its customer segregated accounts a day before it was audited by CME Group Inc., according to a preliminary report filed on Monday by James W. Giddens, the trustee overseeing the liquidation of the firm.

The shortfall in customer segregated funds began on Oct. 26 and continued to grow in size until its parent filed for bankruptcy on Oct. 31, according to the report. The report revealed that MF Global used money from customer segregated accounts to fund other daily activities.

"In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used, apparently with the assumption that funds would be restored by the end of the day," the report states.

As the lead auditor of MF Global, CME was in charge of enforcing minimum financial and reporting requirements. On Oct. 27, after MF Global announced that its credit rating was downgraded, CME sent auditors to the Chicago offices to review the segregation report for Oct. 26.

That report showed that the segregation was intact, CME's Executive Chairman Terry Duffy testified on Dec. 15 before the House Committee on Financial Services.

"These procedures continued through Friday (Oct. 28) evening," Duffy said. "At the time they left the office they had noted only immaterial discrepancies and we saw no indication that the segregated funds were missing as of Wednesday October 26th."

Duffy told legislators that CME auditors returned on Oct. 30 because the draft report for Oct. 28th showed a $900 million shortfall caused by an accounting error. "No such error was ever found," Duffy told legislators.

On Oct. 31, MF Global notified the U.S. Commodity Futures Trading Commission, which oversees the U.S. commodity industry, that customer money had been transferred out of segregated accounts, causing a shortfall of about $600 million. That same day, MF Global's parent company filed for protection from creditors.

Giddens has since said that the figure is approximately $1.2 billion. The trustee will now try to find which entities received money from customer segregated accounts.

"We will then determine whether there is a sound and legal basis for recoveries against third parties that will help make customers whole," Giddens said in a statement. "These will be very complex legal and factual determinations, which we will make consistent with our duty as the advocate for the former customers of MF Global Inc."

CME on Monday reiterated what they have said before, saying, "We were made aware of the shortfall in the early hours of Oct. 31."